first majestic silver

Gold Market and Precious Metals Commentary

January 12, 1999

Technicals -

Darth Vadar lives. The evil forces struck hard today and socked it to gold. Never let them smile more than a few days is the bear's motto. The catalyst today was the intervention by the BOJ to support the dollar versus the yen as the dollar staged a sharp rally. At the end of the trading day, it was not the end of the world. The bears gave it all they had and even threw the kitchen sink at the bulls in an attempt to finally break the gold market down. A $6 move is the standard when that occurs. $4.30 is not. Technical support in the high $280's held. Perhaps, we have a bear trap here.

Silver sold off, after closing higher 5 days in a row. It probably would have closed up again if gold was not battered. Last night, silver was 5 cents higher when the Japanese pulled a sneak attack on their own yen. A week ago, when the price of silver was $4.94, we said we thought it looked "sold out". The price is now 30 cents higher. We still think the same way and it appears to us someone is to trying to buy silver in size. This market is explosive. Even though the price of silver rallied sharply, the premiums in India remained very firm at 8.2% as of this A.M., which is adequate for importing silver into that country. After the close, a report was issued by the CFTC showing that the silver stocks dropped 628,656 ounces and now stand at only 76,275,457 ounces. $9.78 is our target by year end. Only a close below $5.00 can derail this "Silver Streak"

Fundamentals -

The Goon Squad acted right on cue. Last Friday, one of our sources made a very specific comment to us that he saw bullion houses cap the gold market rally. The comment was made that it was clear to him that borrowed gold hit the market to make sure the gold rally did not carry too far.

Yesterday, gold moved up a bit anyway as the yen soared. When the Japanese government intervened today, the market was heavier than it looked with available gold and the market sold off.

Knowing what was going on, one of the Leader of the Pack, JP Morgan, came out singing at exactly the right time. Their precious metals analyst, Kevin Crisp, released a report today in London predicting gold prices would fall in early 1999 as the "market focused on supply and demand issues, deflation in Southeast Asia and the drop in inflation in Europe and the United States."

Reuters - London - Jan 12 - " Even though significant event risk remain in global markets---economic, political and financial--we see no reason to believe that gold will respond any differently than it has in the recent past," Crisp said. "We forecast the gold price will average $280 in 1999, but will trade as low as $265 per troy ounce before the end of March."

The Midas camp continues to believe that there has been, and is, an orchestrated effort to cap the gold price. This effort has been promulgated by our Fed, other official sectors, and a group of New York financial institutions. JP Morgan and Goldman Sachs just formed a crisis risk management group with 10 other financial institutions to handle emergency situations. It is our opinion that management of all their huge gold short positions is one of them.

We reiterate this point, because if we are correct about all of this, something has to happen to trigger an upward move in the gold price. This Goon Squad has been beating the gold market to death-forcing it into financial oblivion and off the radar screen of many investors. The "squad", and this gold price capping camp, sell at strategic times. They make a point of making public statements that the price of gold cannot rally because of outside events. The press eats it up and prints it. The gold and silver markets have not rallied as a result of external events in years anyway (although that should change very soon-see below), so there is no reason yet for that to be the case now. They put out that sort of thing to the press anyway to spread the bear story. They want to make sure to tell you not to buy gold in a future crisis because that effort will be futile. But the real bear story is that they make sure gold does not rally very much at any given point. One of the big sellers again today was their crisis associate, Goldman Sachs, of course.

Our camp believes, ironically enough this cabal is actually desperate in a way. They know - I repeat, they know they have a tiger by the tail. They are all heavily short. They must find a way out of this or they could be in serious trouble. They could not cover their short positions if they had, or wanted, to. There is just not enough physical gold available in the short term to accommodate their needs.

Thus, some food for thought. When silver broke a few weeks back to $4.58 and then rallied back, we said it was "bozo" selling, but that the bear raid effectuated a killer move that cleared out stale bulls. Ever since then, the price of silver has performed very well ( in noticeable contrast to gold ) as it rallied over 80 cents. Right after the raid occurred, we told you we would not be surprised if Buffet's broker, Jimmy DePiazza, engineered the silver price breakdown. We felt he would do so to set the stage for the real bull move.( more on this some other time ).

We could have a similar situation in gold. We have been asking ourselves, "How do these big boys and very smart people" plan to exit their gold shorts? They see what is going on in Brazil. They know the credit spreads are not coming in. They know that many financial institutions have arbitrage trades on the books that are big losers. They know there are other Long Term Capital Managements out there. They see the excessive speculation in the internet stocks and they know it is classic, blow-off market action.

Good squad leader, Goldman Sachs, has a new CEO. The previous CEO, Corzine, was "sacked" because Goldman had become too much like a hedge fund. There was a very good reason that their IPO was cancelled. Their proprietary trading had gone south. The new CEO probably does not want a repeat. If we are right about their gold shorts, and the price of gold really explodes due to trapped shorts, he will not be around too long. We know that the crisis management team is in place. The best way to resolve this gold short issue would be to do what we think Jimmy DePiazza did in silver. Bomb the market! Put out bearish commentary that the press would disseminate. Scare the producers into hedging. Bring on the spec shorts. Then when all are good and short, start a major covering campaign. Maybe it will work, maybe not. But, at least they have a chance. Crisis management at work.

I am sure some of you thought our explanation of the silver rout to $4.58 was "out there". It looks pretty right on now. Maybe our explanation of this gold sell off will look just as good down the road too.

Obviously, this is only a theory on my part. However, if that is not the case, we are going to need the financial markets to spin out of control for the price of gold to move a good deal higher. These forces are very powerful as they have shown. But, not omnipotent. The Midas camp believes the possibility of market chaos happening IS VERY LIKELY and thus, we are very bullish for the price of gold. Our camp has been a proponent of the notion that we have a "credit bust" coming. This means defaults. This means paper that was good, will be no good, no longer. There is Gitic in China. (Their state run banking institutions were forced to lend to state run companies that could not make any money ). There was Russia. There was Long Term Capital. Is Brazil next? Another one of their states is delaying payments to their central government. Defaults mean loss of confidence. It is only a matter of time before this loss of confidence leads to a surge in invest demand for gold ( regardless of what JP Morgan professes ).

That investment demand is surging in Japan. The premiums there are $1.40 to $1.50 over loco London. The last time the price of gold was this low in yen terms was 1995. Demand surged then to 36 tonnes per month. That is a big number. Demand for gold bars was very strong last October. Then it was a big number too - yet, less at 20 tonnes. To give you an idea what this could mean, investment gold demand in 1995 increased 72.5 % over the previous year to 174.2 tonnes. Yet, JP Morgan says gold demand is terrible.???? How about the notion that they had to have some kind of reason to predict the price of gold would go to $265 in an attempt to get others to short the market.

Gold Field Mineral Services issued one its 3 yearly reports on the gold market. Of note was the fact that they said "official sector sales increased by an estimated eight percent in 1998 to 437 tonnes. Reuters: "Although there were no announcements concerning large-scale sales, GFMS said sales were convincingly suggested by market indicators and other evidence". This is important because it means that demand for gold had to be greater than expected in 1998. We say it was due to official sector Asian buying. We did not see that mentioned in the GFMS report.

According to GFMS, mine supply for 1998 was a record 2529 tonnes, 21 tonnes less than we heard it would be. They also stated that mine production costs have dropped below $200/oz in the third quarter of 1998 which could put pressure on the gold price. "Perhaps, even more importantly though, mine production cost have plummeted in the past year. The implications are firstly that mining companies can maintain production levels for the foreseeable future."

Secondly, GFMS said, "further hedging could be done even at prices around $287 because the locked-in margin could be quite attractive".

They also said fabrication demand in 1998 held up due to increased Indian, European and North American jewelry demand, which almost completely offset the collapse in Asia. So why is demand going to be weak in early 1999? Imports of gold to India's western city of Ahmedabad alone rose sharply ( 63% ) from 11.313 tonnes in November to 18,439 tonnes in December according to Reuters. This is not weak demand.

How about China then? Platts - Hong Kong - Jan.11 - " To meet the increasing domestic demand for gold jewelry, more than 9,000 goldsmith shops have been set up across the country currently compared to only 2,000 at the beginning of the 1990's. Industry statistics indicate that more than 500 enterprises are now producing gold jewelry, an increase of 90% from 1992. That is not weak demand. By the way, the gold bar premiums in China are 40 cents today. That is healthy demand, not weak.

GFMS sees the price of gold trading between $270 and $310 in 1999.

If we believed their price forecast for 1999, Midas would take up playing tiddlywinks instead of following the gold market. Too much torture involved in this. We see $400 on the upside not $310. You know many of our reasons, so we will not repeat all of them ad nauseum at this point in time. Suffice to say, we do not think the big move will come out of a traditional supply/demand model. It will come because the gold loans are too big and the shorts will have to cover as financial markets go into a tailspin. It will come because investment demand for gold will go through the roof. That will occur as more derivative plays go sour and more defaults surface around the world. The reputation of King central banks will go from the penthouse to the outhouse. The investment by the Central Bank of Italy in Long Term Capital Management that went sour was only the first blemish on recent central banking activities. There are many more castigations to come.

Potpourri and the Gold Shares -

The XAU hit a brick wall and closed down 69.99 down 4.93. Right at the 70 magic number. Still looks good.

Demand for Platinum bars in China and Japan is very strong. The underpinnings of the platinum market are very favorable according to John Brimelow.

Market alert info. The Brazilian stock market closed down 7.62 % today after going down 5 per cent yesterday John Brimelow informed me that it is estimated that $943 million in capital fled Brazil today alone. Venezuela was down 6.58%. Mexico was down 3.69%.

We hear feedback from the most informed sources that they do not understand the gold market price action. These are high level people that see official gold flows ( sales ). They do not see them now like they did last year. Yet, gold cannot move at all. Perhaps, they should just schedule a meeting with you know who.

Now let's see here. We reported to you yesterday via email that the Bank of China was an unusual big buyer of U.S. paper. Greenspan is over in Hong Kong and has banking meetings ( BIS, etc ). Previously unscheduled meetings are arranged with Chinese officials. Gitic type problems have to be poured over. Then, all of a sudden there is official intervention over the Yen. The gold price is capped. And so on. High level Monopoly.

If you did not catch "A Financial Fairy Tale" by Charles Peabody at the Hemingway Table. Give it a look. What a hoot. A scary hoot. Some of the "fairy tale" is upon us. Only the beginning. BMC is Chase Manhattan Bank for your info - I had many inquiries.

Speaking of Charles Peabody, the bank stocks were hit hard today. Looked to me like they were down some 3 and 1/2%. Remember Charles is calling for a move down of 60 to 80%!!!! This is not a call on overzealous internet stocks or high tech high flyers. We are talking about the regional and money center banks here. If he is correct, how do you think confidence is going to hold up in the equity markets? Do you think solvency will become an issue?

Got a note from Charles today. " The chart of the Mexican Peso is looking eerily similar to that of emerging Asian currencies prior to their second round of devaluations. Could it be that the international market place is starting to question the independence of the central bank of Mexico? Governor Guillermo Ortiz has been implicated in the scandals surrounding Fobaproa and has waged a weak war on inflation. Patience may be running out.

John Crudele of the New York Post is a very perceptive writer. Some quotes from his latest. " The Federal Reserve's job as pundits put it is to take the punch bowl away before the party gets too rowdy. It's in their job description right next to being independent of any political influence. But this Fed has not been doing the job."

Relating that the Fed is not doing its job, Crudele notes how the bubble is getting bigger. "The Federal Reserve is supposed to keep things from getting out of hand like this ( internet mania, etc, ) It is supposed to keep the stock market and the economy sober so that the United States doesn't suffer the morning-sickness calamity that befell us in 1987, and especially in 1929".

"Alan Greenspan has not done his job and he knows it. According to people who know him well enough to understand his innermost thoughts, the Fed chairman is now panicked about the stock market's behavior. He's petrified that the market will go much higher on his watch; even more horrified that the bubble might burst. "

"In the last few weeks, for instance one broad money supply figure has increased 14 percent". According to Crudele this Greenspan induced money infusion is feeding the bubble as the money flows into the market, not the economy".

"A disaster waiting to happen". Crudele concludes by saying that Greenspan has been hinting to the press that he will act if the stock market collapses. And that is the reason for presenting you with quotes from his story. It happens to coincide with Teddy Butler Henderson said he would do as a result of his conversations with Greenspan 28 years ago: Keep the Kondratieff wave collapse from kicking in. He will do so at all costs.

That is why the Midas camp is so bullish on gold. The defaults are coming. Brazil is toast. The markets will plunge. The credit spreads will widen. Derivative plays will blow up. Liquidity will dry up again. Fear will take over. Investment demand for gold will soar. The shorts will have to try and cover. Good luck. Greenspan will drop interest rates in another panic. That will reduce the contango. Producers will lose their incentive to sell forward. Lease rates might soar. In other words, all heck is going to break loose. That is the gold scenario as Midas sees it: North of $400 by year end.

Bill Murphy (Midas)

After graduating from Cornell University, Bill was a starting wide receiver with the Patriots of the old American Football League and has been around the financial and commodities markets ever since. He owned a futures firm in N. Y. that specialized in precious metals and was a contributor to Veneroso Associates, a global strategic investment firm and producer of the 1998 Gold Book Annual.


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